Trade Finance Laws Every Indian Exporter Must Know

FEMA. Foreign Exchange Management Act 1999

FEMA is the foundational statute governing all foreign exchange transactions in India, including export proceeds. It replaced the draconian FERA (Foreign Exchange Regulation Act 1973) and shifted the regulatory approach from "conservation of foreign exchange" to "management and facilitation" of forex flows. For exporters, FEMA is the law that dictates how you receive payment, in what currency, through which banking channels, and within what timeline.

Key provisions for exporters

• Section 5. Current account transactions: Export payments are current account transactions and are freely permitted. No prior RBI approval is needed to receive export proceeds in any freely convertible currency.
• Section 6. Capital account transactions: If your export involves deferred payment beyond the permitted period, equity investment abroad, or setting up an overseas subsidiary to facilitate exports, these fall under capital account and require RBI approval or adherence to the Liberalised Remittance Scheme (LRS) limits.
• Section 7. Export of goods and services: Every exporter must furnish a declaration to the prescribed authority (customs / the AD bank) regarding the full export value of goods or services. Under-invoicing or over-invoicing triggers FEMA penalties.
• Section 8. Realisation and repatriation: Export proceeds must be realised and repatriated to India within the period specified by RBI (currently 9 months). Holding export proceeds abroad without RBI approval is a contravention.
• Section 13. Penalties: FEMA contraventions attract a penalty of up to three times the amount involved, or Rs 2 lakh where the amount is not quantifiable. Compounding is available for most violations, but repeated defaults invite adjudication proceedings.

FEMA Regulations relevant to exporters

RBI Master Direction on Export of Goods and Services

The RBI Master Direction on Export of Goods and Services (updated January 2016 and amended periodically) is the operational rulebook that translates FEMA provisions into day-to-day banking procedures for exporters. Every Authorised Dealer (AD) bank follows this direction when processing your export documents, negotiating LCs, handling advance remittances, or processing write-off requests.

Critical rules every exporter must know

• Repatriation deadline. 9 months: Export proceeds must be realised and repatriated within 9 months from the date of export. The date of export is the "Let Export Order" (LEO) date on the shipping bill. Extensions beyond 9 months require AD bank or RBI approval depending on the amount.
• Write-off provisions: AD banks can approve write-off of unrealised export bills up to 5% of total export proceeds realised in the previous calendar year, subject to conditions: the exporter must have made reasonable efforts to recover payment, the case must not involve fraud or misrepresentation, and the outstanding must have been outstanding for at least one year.
• Advance remittance (payment before shipment): Exporters can receive advance payment from overseas buyers. If the advance is received and goods are not exported within one year, the advance must be refunded to the buyer with interest. AD banks monitor advance remittances through the Purpose Code P0101.
• Third-party payments: Export proceeds can be received from a third party (not the buyer named on the invoice) subject to conditions. The exporter must provide a declaration linking the payment to the underlying export transaction, the third party must be in a FATF-compliant jurisdiction, and the AD bank must be satisfied about the bona fide nature of the arrangement.
• EEFC account: Exporters can retain up to 100% of their export proceeds in an Exchange Earners Foreign Currency (EEFC) account, but the balance must be converted to INR at the end of each month if not utilised for permissible purposes.

Negotiable Instruments Act 1881

The Negotiable Instruments Act 1881 governs bills of exchange, promissory notes, and cheques. The foundational payment instruments in trade finance. While digital payments have reduced the use of paper instruments in domestic trade, bills of exchange remain central to international documentary collections and are still required by many LC transactions.

Relevance to export transactions

• Bill of exchange (Section 5): An unconditional order by the drawer (exporter) to the drawee (buyer) to pay a specified sum on demand or at a fixed future date. In export collections, the bill of exchange accompanies the shipping documents and is presented to the buyer through the banking channel.
• D/P (Documents against Payment): The collecting bank releases shipping documents to the buyer only upon payment of the bill of exchange. This gives the exporter security. The buyer cannot clear goods from customs without the documents.
• D/A (Documents against Acceptance): The collecting bank releases documents upon the buyer's acceptance (signing) of the bill of exchange, giving the buyer credit until the maturity date. The exporter bears the risk of non-payment at maturity.
• Promissory note (Section 4): Sometimes used in supplier credit arrangements where the buyer issues a promissory note in favour of the exporter for deferred payment. The note can be discounted with a bank for immediate liquidity.

UCP 600. Uniform Customs and Practice for Documentary Credits

UCP 600 is the ICC (International Chamber of Commerce) rulebook that governs letters of credit worldwide. Published in 2007 and in force since July 1, 2007, it contains 39 articles that define the rights and obligations of all parties to an LC. The applicant (buyer), the beneficiary (exporter), the issuing bank, the advising bank, the confirming bank, and the nominated bank.

Indian banks adopt UCP 600 by default. When an LC states "subject to UCP latest version" or "subject to UCP 600", all 39 articles apply. Understanding UCP 600 is not optional for any exporter who ships on LC terms.

Key articles every exporter must know

URDG 758. Uniform Rules for Demand Guarantees

URDG 758 is the ICC rulebook governing demand guarantees and standby letters of credit. Published in 2010, it provides a standardised framework for bank guarantees issued in the context of international trade. Bid bonds, performance guarantees, advance payment guarantees, and retention money guarantees.

Types of guarantees exporters encounter

• Performance guarantee: Issued by the exporter's bank in favour of the overseas buyer, guaranteeing that the exporter will perform the contract. If the exporter defaults, the buyer can invoke the guarantee and receive payment from the bank. Typically 5% to 10% of contract value.
• Advance payment guarantee: When the buyer pays an advance before shipment, the buyer's bank or the exporter's bank issues a guarantee that the advance will be refunded if the exporter fails to ship. This is the most common guarantee type for project exports and capital goods.
• Bid bond / tender guarantee: Required when bidding on international contracts, guaranteeing that the bidder will sign the contract if awarded. Typically 1% to 5% of the bid value.
• Standby LC (SBLC): Functionally identical to a demand guarantee but structured as a letter of credit. Governed by either UCP 600 or ISP98 depending on the terms. Often preferred in US transactions where demand guarantees are less common.

Incoterms 2020

Incoterms (International Commercial Terms) are standardised trade terms published by the ICC that define the responsibilities of buyers and sellers in international transactions. Incoterms 2020, effective January 1, 2020, contains 11 terms that allocate costs, risks, and responsibilities between the exporter and the buyer at different points in the supply chain.

Incoterms are not law. They are contractual terms that apply only when explicitly incorporated into the sale contract. However, they have legal implications because they determine the point of risk transfer, which in turn affects insurance obligations, freight cost allocation, and liability in case of loss or damage during transit.

Key Incoterms for Indian exporters

Carriage of Goods by Sea Act 1925 / Hague-Visby Rules

The Carriage of Goods by Sea Act 1925 (COGSA) is India's statute governing the rights and liabilities of carriers and shippers in sea transport. It incorporates the Hague Rules (Brussels Convention 1924), and Indian courts also reference the Hague-Visby amendments in their interpretation. For exporters, this Act governs the bill of lading. The single most important document in export trade finance.

The bill of lading: three roles

• Receipt for goods: The B/L is evidence that the carrier has received the goods as described. A "clean" B/L means the goods were received in apparent good order and condition. A "claused" or "foul" B/L has remarks about damage or short shipment. Banks will reject claused B/Ls under LC transactions.
• Evidence of contract of carriage: The B/L contains or evidences the terms of the contract between the shipper (exporter) and the carrier. It specifies the port of loading, port of discharge, freight terms, and the carrier's liability limitations.
• Document of title: This is the critical function for trade finance. The B/L can be endorsed and transferred, giving the holder the right to claim the goods. This is what allows banks to hold the B/L as security in LC and D/P transactions. Without the original B/L, the buyer cannot clear goods from customs.

Carrier liability limits

Under the Hague Rules as adopted in India, the carrier's liability for loss or damage to cargo is limited to approximately GBP 100 per package or unit, unless the shipper declares a higher value on the B/L and pays additional freight. The Hague-Visby amendments raise this to 666.67 SDR per package or 2 SDR per kilogram of gross weight (whichever is higher). Indian courts have applied both standards depending on the specific case and the B/L terms.

Marine Insurance Act 1963

The Marine Insurance Act 1963 governs insurance contracts for export cargo during sea transit. Based on the UK Marine Insurance Act 1906, it defines the principles of insurable interest, utmost good faith (uberrima fides), indemnity, subrogation, and contribution that apply to export cargo insurance policies.

Key provisions for exporters

• Insurable interest: The exporter has insurable interest in the cargo from the time of shipment until risk transfers to the buyer under the applicable Incoterm. Under CIF terms, the exporter must arrange insurance for the buyer's benefit for the full voyage.
• Valued vs unvalued policies: Export cargo is typically insured on a valued basis at CIF value + 10% (i.e., 110% of CIF). This is also the UCP 600 requirement for LC transactions under Article 28.
• Institute Cargo Clauses: Insurance cover is classified into ICC (A), ICC (B), and ICC (C). ICC (A) is all-risks cover; ICC (C) is the minimum. Under CIF Incoterms, the exporter is obligated to provide minimum ICC (C) cover unless the buyer specifies a higher level.
• Subrogation: After paying a claim, the insurer steps into the exporter's shoes and can pursue recovery against the carrier, port authority, or any third party responsible for the loss. Do not settle with the carrier without informing your insurer.

ECGC Act. Export Credit Guarantee

ECGC (Export Credit Guarantee Corporation of India) provides credit risk insurance to Indian exporters against non-payment by overseas buyers. Established under the Companies Act and governed by the ECGC Act, it is a wholly government-owned corporation that insures both commercial and political risks.

Risk categories covered

Policy types

• Whole Turnover Policy (Standard): Covers all exports to all buyers during the policy period. Premium is calculated on total export turnover. This is the most cost- effective option for regular exporters and is required by most banks for export finance facilities.
• Specific Shipment Policy: Covers individual high-value consignments to specific buyers. More expensive per shipment but useful for one-off large orders or exports to high-risk countries.
• Bank Guarantee cover: ECGC provides cover to banks against losses on export credit extended to exporters. This is not a direct exporter policy but helps exporters indirectly by enabling banks to extend export packing credit and post-shipment finance at favourable terms.

Factoring Regulation Act 2011

The Factoring Regulation Act 2011 provides the legal framework for factoring transactions in India, including export factoring. Factoring is the sale of export receivables to a factor (a specialised financial institution) at a discount, giving the exporter immediate liquidity without waiting for the buyer to pay. The factor assumes the credit risk of the buyer (in non-recourse factoring) or retains recourse to the exporter (in recourse factoring).

How export factoring works

• Assignment of receivables: The exporter assigns (sells) export invoices to the factor. Under the Act, the assignment must be registered with the Central Registry (CERSAI) to be effective against third parties.
• Advance payment: The factor pays the exporter 70% to 90% of the invoice value upfront. The balance (minus the factoring fee) is paid when the buyer pays the factor.
• Two-factor system: In international factoring, the export factor (in India) works with an import factor (in the buyer's country) who handles collection and bears the buyer credit risk. This is facilitated through Factors Chain International (FCI).
• NBFC factors: Only banks and NBFCs registered as factors with the RBI can undertake factoring business in India. Companies like SBI Global Factors, Canbank Factors, and IFCI Factors are registered entities.

MSME Development Act 2006. Delayed Payment Provisions

The Micro, Small and Medium Enterprises Development Act 2006 contains powerful provisions (Sections 15 to 24) to protect MSME suppliers (including MSME exporters) against delayed payments by buyers. While primarily designed for domestic transactions, these provisions apply to MSME exporters dealing with domestic intermediaries, buying agents, export houses, and domestic supply chain participants.

Key provisions

• Section 15. Payment deadline: Any buyer who purchases goods or services from an MSME supplier must make payment within the agreed period, which cannot exceed 45 days from the date of acceptance or deemed acceptance.
• Section 16. Interest on delayed payment: If payment is not made within 45 days, the buyer is liable to pay compound interest at three times the bank rate notified by RBI. As of August 2026, the RBI bank rate is 6.75%, making the penal interest 20.25% per annum. This interest runs automatically. No demand notice is required.
• Section 17. No tax deduction for interest: The buyer cannot deduct the interest payable under Section 16 as a business expenditure for income tax purposes. This is a powerful incentive for buyers to pay on time.
• Section 18. MSME Facilitation Council: MSME suppliers can file disputes before the Micro and Small Enterprises Facilitation Council (MSEFC) in their state for conciliation and arbitration. The Council must dispose of the reference within 90 days.

Foreign Trade (Development & Regulation) Act 1992

The Foreign Trade (D&R) Act 1992 is the umbrella legislation that empowers the Central Government to formulate India's export-import policy and establish the Directorate General of Foreign Trade (DGFT) as the implementing authority. For exporters, this Act is the source of the IEC requirement, the legal basis for export incentive schemes, and the framework for export restrictions and prohibitions.

Key provisions

• Section 5. IEC (Importer Exporter Code): No person can export or import goods without obtaining an IEC from DGFT. The IEC is a 10-digit code linked to your PAN and is valid for life, subject to annual updating (ANF-2A) on the DGFT portal. Failure to update deactivates the IEC.
• Section 3. Export-import policy: The Central Government formulates the Foreign Trade Policy (FTP) under this section. The current FTP 2023 covers export incentives (RoDTEP, SEIS, Advance Authorisation, EPCG), export promotion measures, and trade facilitation provisions.
• Section 11. DGFT powers: DGFT can suspend, cancel, or impose conditions on the IEC of any person found to have violated the Act, FTP, or any order made thereunder. DGFT can also impose penalties for contravention of ITC(HS) classification restrictions.
• Schedule 2. Export restrictions: The Act read with ITC(HS) Schedule 2 classifies all export goods as free, restricted, or prohibited. Restricted goods (e.g., SCOMET items) require a DGFT licence before export. Prohibited goods (e.g., certain wildlife products) cannot be exported at all.

Customs Act 1962

The Customs Act 1962 is the principal legislation governing the import and export of goods across India's customs frontiers. For exporters, this Act governs the entire physical export process. From filing the shipping bill to obtaining the Let Export Order, claiming duty drawback, and completing the export documentation cycle.

Export-relevant provisions

• Section 50. Shipping bill: Every exporter must file a shipping bill (or bill of export) with customs before loading goods for export. The shipping bill contains the product description, HS code, FOB value, export incentive declarations (RoDTEP, Drawback), and buyer details.
• Section 51. Clearance for export: After examination (if selected for physical inspection), customs grants the Let Export Order (LEO) on the shipping bill. The LEO date is the legal date of export for all purposes. FEMA repatriation deadline, incentive eligibility, etc.
• Section 74/75. Duty drawback: Section 74 covers drawback on re-exported imported goods. Section 75 covers drawback on goods manufactured using imported or excisable inputs. This is the provision under which All Industry Rates and Brand Rates of drawback are sanctioned.
• Section 41. Export General Manifest (EGM): The carrier (shipping line or airline) must file an EGM with customs after departure, listing all export cargo on board. EGM filing triggers the processing of export incentives including RoDTEP and drawback.
• Section 113. Confiscation of export goods: Goods attempted to be exported contrary to any prohibition, restriction, or condition can be confiscated by customs. This includes exports without a valid IEC, exports of prohibited items, or exports violating SCOMET controls.

Indian Contract Act 1872

The Indian Contract Act 1872 is the general law governing contracts in India, including international sale contracts where Indian law is the governing law. While most international sale contracts are governed by the law of the buyer's jurisdiction or a neutral jurisdiction, many Indian exporters (particularly SMEs) either specify Indian law as the governing law or end up with Indian law by default (when the contract is silent on choice of law).

Key principles for export contracts

• Section 73. Compensation for breach: The party who suffers a breach is entitled to compensation for any loss or damage caused by the breach, to the extent such loss was foreseeable at the time of contract formation. In export disputes, this includes loss of profit, additional shipping costs, warehousing charges, and consequential damages.
• Section 56. Frustration (force majeure): A contract becomes void if performance becomes impossible or unlawful after formation due to an event that the parties could not have prevented. Indian law on frustration is narrower than common law force majeure. Mere difficulty or increased cost of performance is not frustration. Export contracts should include an explicit force majeure clause rather than relying on Section 56.
• Section 74. Liquidated damages: If the contract specifies a sum payable for breach (liquidated damages), the aggrieved party is entitled to receive reasonable compensation not exceeding the stipulated amount. Indian courts have consistently held that the stipulated amount is the maximum, not the automatic amount.
• Sale of Goods Act 1930: This companion statute (derived from the Contract Act) governs the transfer of property in goods, including the rules for when title passes from seller to buyer. In export transactions, the passage of title interacts with the Incoterm to determine when risk and ownership transfer.

Arbitration and Conciliation Act 1996

The Arbitration and Conciliation Act 1996 is India's primary legislation on domestic and international commercial arbitration. Based on the UNCITRAL Model Law, it provides the framework for arbitrating international trade disputes, enforcing foreign arbitral awards, and recognising arbitration agreements in export contracts. For exporters, this Act determines where and how disputes with overseas buyers are resolved.

Structure of the Act

Key considerations for exporters

• New York Convention enforcement: India is a signatory to the New York Convention (1958), which means foreign arbitral awards from Convention countries are enforceable in India. An exporter who obtains an award from SIAC (Singapore), ICC (Paris), or LCIA (London) can enforce it in India through the competent High Court. The grounds for refusing enforcement are narrow.
• Arbitration clause drafting: The arbitration clause in your export contract should specify the seat of arbitration (determines the procedural law), the institutional rules (ICC, SIAC, MCIA, etc.), the number of arbitrators, the language, and the governing law of the contract. A poorly drafted arbitration clause is the most common cause of jurisdictional disputes.
• Interim measures: Under Section 9, Indian courts can grant interim measures (attachment of assets, injunction against asset disposal) even in support of foreign- seated arbitration. This is critical when the buyer has assets in India that may be dissipated before the award.
• 2015 and 2019 amendments: The amendments streamlined the arbitration process. Imposing a 12-month timeline for completing arbitration (extendable to 18 months with party consent), reducing court intervention, and providing for the appointment of arbitrators by institutions rather than courts.

Frequently Asked Questions

What is the FEMA repatriation deadline for export proceeds?

Under FEMA read with the RBI Master Direction on Export of Goods and Services, export proceeds must be realised and repatriated to India within 9 months from the date of export (LEO date on the shipping bill). Failure to repatriate within this period results in the exporter being placed on the EDPMS caution list, which blocks future export incentives and can attract penalties under FEMA Section 13.

What is UCP 600 and how does it apply to Indian exporters?

UCP 600 (Uniform Customs and Practice for Documentary Credits) is the ICC rulebook governing letters of credit worldwide. Indian banks adopt UCP 600 by default. When an LC states "subject to UCP 600", all 39 articles apply. Key provisions for exporters include Article 14 (5 banking days for document examination), Article 16 (discrepancy notice rules), and Articles 19-27 (transport document requirements).

What Incoterms should Indian exporters use?

The most commonly used Incoterms for Indian exports are FOB (Free on Board) for sea freight (where risk transfers when goods are on board the vessel) and CIF (Cost, Insurance, and Freight) where the exporter also arranges freight and insurance. FCA (Free Carrier) is increasingly used for containerised cargo. The choice of Incoterm directly affects your insurance obligation, freight cost allocation, and risk exposure. See our Incoterms 2020 guide for detailed advice.

What does ECGC cover for Indian exporters?

ECGC provides insurance cover against commercial risks (buyer insolvency, protracted default, failure to accept goods) and political risks (war, import restrictions, payment moratorium, exchange transfer delays). ECGC offers whole turnover policies, specific shipment policies, and bank guarantee covers. See our ECGC guide for policy comparison and premium rates.

What is the MSME delayed payment provision for exporters?

Under Sections 15-24 of the MSME Development Act 2006, any buyer who delays payment to an MSME supplier beyond 45 days is liable to pay compound interest at three times the bank rate (currently 20.25% per annum). MSME exporters can file complaints on the MSME Samadhaan portal for facilitated resolution.

Is a bill of lading a document of title in India?

Yes. Under the Carriage of Goods by Sea Act 1925, a bill of lading serves three functions: receipt for goods, evidence of the contract of carriage, and document of title. As a document of title, it can be endorsed and transferred, making it central to LC and D/P transactions. Banks require clean, on-board B/Ls under UCP 600.

Can Indian exporters enforce foreign arbitration awards in India?

Yes. India is a signatory to the New York Convention, and Part II of the Arbitration and Conciliation Act 1996 provides the framework for enforcing foreign awards. Awards from SIAC, ICC, LCIA, or any tribunal in a Convention country are enforceable by filing an application before the competent High Court. Grounds for refusal are narrow.

What is the IEC requirement under the Foreign Trade Act?

The Foreign Trade (D&R) Act 1992 requires every person exporting or importing goods to obtain an Importer Exporter Code (IEC) from DGFT. The IEC is a 10-digit code linked to your PAN and is a prerequisite for filing shipping bills, claiming export incentives, accessing ECGC cover, and opening LCs. IEC must be updated annually between April and June on the DGFT portal. See our IEC registration guide.

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Update history

• 2026-08-12 First published.